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Quantitative Finance · Glossary

What is Structuring margin?

Definition 19.6 Derivatives and Volatility · Chapter 19 — The Structured-Products Business

The structuring margin is the difference between a note’s issue price and the value of its components at the issuer’s own funding curve and the desk’s option prices: the revenue shared between the issuer and the distributors.

The participation a two-year 100%-protected note can offer, after a 1.5% margin, against the issuer’s funding spread (rate 3%, dividend yield 1.5%, chapter 9’s two-year volatility). The spread, not the option, sets the participation: without it the note could offer 35%. Data: the tutorial.
Figure 19.1. The participation a two-year 100%-protected note can offer, after a 1.5% margin, against the issuer’s funding spread (rate 3%, dividend yield 1.5%, chapter 9’s two-year volatility). The spread, not the option, sets the participation: without it the note could offer 35%. Data: the tutorial.
Two two-year 100%-protected notes that each cost the client 100: 70% participation without a cap, which needs a 2.4% funding spread, and full participation capped at 113.3%, which a 1% spread pays for. Data: the tutorial.
Figure 19.2. Two two-year 100%-protected notes that each cost the client 100: 70% participation without a cap, which needs a 2.4% funding spread, and full participation capped at 113.3%, which a 1% spread pays for. Data: the tutorial.

Examples

Example 19.7 (Seventy percent participation)

A two-year note, 100% protected, on an index with a 3% rate and a 1.5% dividend yield, at chapter 9’s two-year at-the-money volatility of 20.5%. The at-the-money call costs 12.49 per 100, and the margin is 1.5. At a zero funding spread the bond costs 94.18, leaving 4.32 for options: a participation of 34.6%. Each half point of spread adds about 7.5 points of participation. At 1% it is 49.6%, at 2% it is 64.2%, and at 2.40% the bond costs 89.76 and the participation reaches 70% (Figure 19.1).

Example 19.8 (A one-year reverse convertible)

Strike 90%, one year, the issuer’s spread 1%, the same market. The investor sells 100/0.9100/0.9 puts struck at 90%, worth 4.26, and the issuer’s funding benefit is worth 3.92. After a 1.5 margin the note pays a coupon of 6.96%, against a risk-free rate of 3%. If the index ends below 90%, the investor receives 100 ST/(0.9 S0)100\,S_T/(0.9\,S_0) instead of par, and the coupon.

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